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Series: The Mekong Region and Japan Part 3: Laos Final Part Sub-regionally Complementary Industrialization Strategy for The Lao PDR Japanese Companies in The Lao PDR | Professor Motoyoshi Suzuki, PhD. Executive Advisor Ministry of Planning and Investment The Lao People’s Democratic Republic (PDR) [Date of Issue: 29/June/2012 No.0208-0848]

Date of Issue: 29/June/2012

Series: The Mekong Region and Japan Part 3: Laos Final Part
Sub-regionally Complementary Industrialization Strategy for The Lao PDR
Japanese Companies in The Lao PDR

Professor Motoyoshi Suzuki, PhD.
Executive Advisor
Ministry of Planning and Investment
The Lao People's Democratic Republic (PDR)


By pursuing a sub-regionally complementary industrialization strategy, whereby capital-intensive upstream processing is conducted at a Thai mother factory and the semi-finished products are exported to a second plant in the Lao PDR for labor-intensive downstream processing, sets up a win-win relationship between a country with industrial clusters where skyrocketing production costs are pushing down price competitiveness and a neighboring underdeveloped country which has few job opportunities and a supply of cheap labor.


The Lao People's Democratic Republic is a landlocked nation bordered by five other countries—China, Thailand, Vietnam, Myanmar and Cambodia. Many European companies are also landlocked, but they have made some progress toward industrialization. The Lao economy is certainly rooted in agriculture, but to find jobs for the country’s growing population, the Lao PDR will have to pursue a certain amount of industrialization, or at least industrialization in certain limited parts of the country, to absorb that labor force. What kind of industrialization strategy using foreign investment is feasible for a country like the Lao PDR with no sea access? First I will outline the current state of the Lao PDR’s foreign direct investment, then turn to the country’s industrialization strategy.

Foreign direct investment (FDI) in the Lao PDR between 2000 and 2011 reached just over US$18.53217 billion on a registered capital basis. In 2011, FDI grew 14 percent year-on-year to over US$3.3 billion, with foreign investment more than doubling compared to 2009. Investment was particularly strong in mining and hydropower generation, industries where the Lao PDR has a comparative advantage. Most of that investment was from China, Vietnam and Thailand. Japan was only in seventh place in terms of cumulative investment over FY2000-2010, or just under three percent in terms of total investment. Japanese firms have established a cumulative total of 106 operations, of which 23, or a quarter of that total, have been in agriculture. Next were industry and handicrafts, which account for 20 operations (22 percent), then textiles, where there have been 15 investments (17 percent) (Figure 1).

Foreign direct investment in the Lao PDR by country
Figure1: Foreign investmemnt in the Lao PDR by country 2000-2011 (cumulative totals)
Table 1: Direct investment in the Lao PDR 2000-2011 by industry (registered capital basis) Now I would like to turn to the sub-regionally complementary industrialization strategy which I recommend for the Lao PDR. Auto and consumer appliance clusters are developing in Thailand, along with a rich pool of human resources. Thailand boasts more than 7,000 Japanese subsidiaries alone, but the minimum wage was raised to 300 baht per day as of April 2012, while the strong baht and high fuel costs are also driving up production costs. Wages in the Lao PDR are one-third to one-fifth as cheap as in Thailand, which, along with the advantage in terms of training of Thai trainers and engineers being able to instruct in the Thai language, could position the Lao PDR as an attractive production base for Japanese firms as a location for their second factory.

The essence of a sub-regionally complementary industrialization strategy is international fragmentation, whereby not only the textile industry, but also parts and subcontracting industries including mobile phone vibrator and small motor assembly and the production of printer head cables, trigger coils for digital camera flashes, wire harnesses for cars, stationery, wigs and processed foods, locate the upstream portion of the processing module in Thailand and export the semi-finished products to a second plant in the Lao PDR for labor-intensive downstream processing. The Lao PDR has cheap labor, cheap land and almost limitless subterranean water resources, allowing firms to cut their costs through cheaper water, phone and power costs than in Thailand. If the amount by which costs are cut is greater than the transport costs associated with locating a plant in landlocked the Lao PDR, it starts making sense for a company to build a factory there.

The more that products and parts feature the following characteristics, the more advantageous manufacturing in the Lao PDR becomes: (1) lightweight and compact; (2) able to tolerate transport-related vibration; (3) a standardized item not affected by design trends; (4) a relatively long delivery time; (5) something made of raw materials that can pass through customs quickly so that it can be manufactured in-plan (within the scope of an annual plan); and (6) the transferred production module is labor-intensive (in other words, industries in which labor costs are a high proportion of the total production cost at the Thai mother factory). Parts processed in the Lao PDR are sent via the Thai mother factory to the final assembly company in Thailand, or carried from the Lao PDR as bonded items to a Thai port and exported to a third country.

Tokyo Coil Engineer Laos Co., Ltd.

Tokyo Coil Engineer Laos Co., Ltd.

This sub-regionally complementary industrialization strategy is not restricted to the case of Thailand and the Lao PDR. Companies with factories in China and Vietnam, both of which have industrial clusters, are leaving their capital-intensive processes at their mother factories at home and building second factories in underdeveloped neighboring countries to which they transfer labor-intensive processes in a new fragmentation pattern. In all these cases, countries with industrial clusters which are losing their price competitiveness in the face of soaring production costs partner with underdeveloped neighboring countries with limited job opportunities and access to cheap labor to create a win-win relationship based on their respective comparative advantages.

In addition, the extremely strong yen of late as well as the impact of the Great East Japan Earthquake have seen Japanese small and medium enterprises begin to put more resources into developing operations in the Lao PDR. The damage caused in Thailand by the 2011 floods is also likely to prompt more Japanese firms to disperse their production bases and move into the Lao PDR in a ‘Thailand +1’ strategy.

(original article : Japanese)

(For the Japanese version of this article)


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